An analysis that found bringing a sports arena and entertainment district to the Potomac Yard neighborhood of Alexandria would result in significant revenue for the city and state of Virginia is overly optimistic, according to one economist.
Last week, Alexandria released the report, put together by consulting firm HR&A Advisors for the Alexandria Economic Development Partnership. It evaluated two scenarios: one that doesn’t include the complex and one that factors in building a new arena and entertainment district.
Adding the arena would bring $34 million a year in tax revenue for Alexandria, and over $40 million per year for the state of Virginia, the report found.
Michael Faulkender, dean’s professor of finance at the University of Maryland and former assistant secretary for economic policy at the Department of the Treasury, said the financial forecasts are “too optimistic, too rosy, from a present value standpoint.”
The revenue projections for Alexandria, he said, are realistic. It makes sense that there may be economic activity in Alexandria that might have otherwise happened elsewhere, but “when you go out to the level of the Commonwealth of Virginia, that’s a little bit more questionable,” Faulkender said.
If people who otherwise would have lived near the arena in D.C. are now moving to Virginia because of the new entertainment district, Faulkender said the state projections would be realistic. But if they’re projecting new income taxes from people who may have lived in the state anyway, the projections are high.
“I can buy that these people otherwise would have lived in Arlington or in Falls Church or in Tysons, but would they really not have otherwise lived in the state of Virginia?” Faulkender said. “And so that seems to suggest that maybe the forecasts for what’s incrementally going to accrue to the state of Virginia could be overstated.”
It’s more difficult to suggest, he said, that “these people would otherwise have lived in Maryland or D.C., and will now live in Virginia, and therefore the state’s going to receive income tax receipts that it otherwise would not have received.”
State revenue projections may also be overstated, he said, because Virginia is likely counting on entertainment district spending as new spending.
“People are now going to spend money in this entertainment district,” he said. “Are we saying that that money would not have been spent elsewhere in the state of Virginia?”
The analysis also used a 4.08% interest rate in its calculation, Faulkender said, which is a rate usually used for risk-free cash flows.
“If you start with inflated cash flows, and then you use a discount rate that’s too low, it’s going to make the estimates too big,” he said.
The analysis projected the entertainment district would bring over 20,000 jobs and hundreds of events — estimates that Faulkender considers realistic.
WTOP contacted HR&A for comment on Faulkender’s observations.
A Monumental Sports & Entertainment spokesman recommended contacting the real estate consultants who did the analysis, and pointed to a recent column from Dr. Terry Clower, director of George Mason University’s Center for Regional Analysis.
Clower wrote that the HR&A study “provides a reasonable basis for deliberations regarding the terms of the proposed public-private partnership.”
The proposed arena complex still has to be approved by the state’s general assembly and the Alexandria City Council.
Another bill that would create the sports arena is now dead, Prince William County Del. Luke Torian, who sponsored it, said this week. But the House budget bill does include creating a sports and entertainment authority.
WTOP’s Neal Augenstein and Dick Uliano contributed to this report.
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